The Gold Report:
Do you have a price forecast for gold and silver
for 2015?
Heiko Ihle: Our long-term
prices for gold and silver are $1,200/oz and $17.50/oz, respectively. We
recently lowered those prices from $1,300/oz and $20/oz given current market
prices.
TGR: What are the essentials of your investment thesis for equities
in the junior gold space?
HI: We pay a lot of attention to three important things: location,
management teams and the viability of the asset or assets.
TGR: Have you made any modifications to that investment thesis for
2015?
HI: Not really. That investment premise hasn't really changed.
Those are the important things to look for.
TGR: What are you specifically seeking when it comes to management?
HI: It's people that you can trust, people who have delivered on
promises. Some people promise that things will happen within a year but they
have been saying that for the past three years. That is frustrating as an
analyst because it messes with our models and it's hard to put faith into
someone who has frequently disappointed the market.
TGR: What about jurisdiction?
HI: Places like Canada, Mexico or the United States are much easier
to do business in than more challenging areas, such as Venezuela or Bolivia.
That's just the way it is. The permitting process in North America may be a
little bit tougher and a little bit more drawn out, but the odds of
nationalization or prohibitive tax policies are substantially smaller.
TGR: Tell us more about the viability of assets.
HI: Some assets are much tougher than others, whether it's because
of punitive government policies or permitting risks or just getting something
financed because no one wants to finance assets in certain locales. I've
definitely seen some projects that I would shy away from.
TGR: Is your investment thesis for silver equities basically the
same?
HI: While gold and silver don't trade in lockstep with each other
given that gold is driven more by investment demand and silver is driven more
by industrial use, there is generally a strong price correlation between the
two. Most of the projects that we look at are silver projects with a gold
component or gold projects with a silver component. There is certainly some
overlap.
TGR: Tell us about some silver equities you're following.
HI: I follow MAG Silver Corp. (MAG:TSX; MVG:NYSE). It's a good company
with operations in Mexico. I've known President and CEO George Paspalas for a
couple of years. He previously ran Aurizon Mines, which was bought by Coeur Mining Inc.
(CDE:NYSE) in a bidding war. MAG Silver owns 46% of the Juanicipio silver
project in Mexico as part of a joint venture with Fresnillo Plc (FRES:LSE),
an experienced silver miner there. I plan to visit Juanicipio next month.
It's a good asset. The grades are phenomenal. Overall, I think it ticks off
all the boxes that we look for when we recommend a company.
TGR: MAG Silver spent $4.6 million ($4.6M) in 2014 on Juanicipio
but it's going to be at least two more years before Juanicipio reaches
production. Will it be worth the wait?
HI: If MAG Silver still owns its share of Juanicipio by then, I
believe it would be. There is a good chance that Fresnillo simply takes MAG
Silver over before that ever happens.
Our price target for MAG Silver is currently $7.78 per share ($7.78/share)
given the lowered commodity price deck.
TGR: What are some other silver names you follow?
HI: I also follow Alexco Resource Corp. (AXR:TSX; AXU:NYSE.MKT), which has
a silver mine in the Yukon. It's a slightly more challenging asset given its
streaming agreement with Silver Wheaton Corp. (SLW:TSX; SLW:NYSE), which limited
profitability when silver was near $15/oz. Alexco's agreement with Silver
Wheaton was recently renegotiated and over the next couple of months,
assuming that commodity prices cooperate, I believe that the company may
restart production. That means silver being in the $17–20/oz range. At the
current silver price, the company can make money with production instead of
just trading tonnage for dollars and not really coming out ahead.
TGR: The recent preliminary economic assessment there outlined a
small, 400 ton per day operation with a six-year mine life. Is that enough to
get investors excited?
HI: It's certainly exciting but I would focus on the bigger picture
that you're going to have with the Flame and Moth deposits at site, coupled
with the fact that there is a functioning mill that is fully permitted.
TGR: Can it raise money based on that story?
HI: It probably could if it wanted to, but my recent conversations
with management suggest that it is not eager to finance in the near term. Instead,
Alexco management has talked about selling a minority stake in Alexco's
environmental remediation business as a means to raise money.
TGR: How much do you think that's worth?
HI: We have $35M in our model for the environmental remediation business
and other non-core assets. My price target on Alexco is $1.40/share.
TGR: Any other silver equities you'd like to share with us?
HI: I'll chat a little bit about Great Panther
Silver Ltd. (GPR:TSX; GPL:NYSE.MKT). It has two main assets in Mexico:
Guanajuato and Topia, which I went to see late in 2014. Guanajuato is
producing silver at decent cash costs. Topia is slightly more challenging.
It's fairly far from civilization, but in a higher silver price environment
it should become an attractive asset.
TGR: Great Panther cut production costs in the third quarter of
2014; is that enough to make money at silver current prices?
HI: I believe the company can make money at current prices. And
given its strong net cash position, I don't really see the company raising a
serious amount of money unless it decides to make an acquisition—and I'm in
favor of Great Panther making a meaningful acquisition. That would help the
company diversify.
TGR: How would it finance an acquisition given that it does not
have much cash flow?
HI: As of Sept. 30, 2014, Great Panther had $20.4M cash. That is a
decent net cash position and it could issue more shares. It could likely make
a $30M acquisition if the target was right. My price target on Great Panther
is currently $1.10/share.
TGR: Perhaps one more silver name before we move on to gold
equities?
HI: Avino
Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE) is a
silver producer. It just put out good production numbers for 2014 from its
Avino mine. For the full year, Avino produced 969,524 oz silver, 5,180 oz
gold and 307,417 pounds copper for a total of 1.34 million ounces (1.34 Moz)
silver equivalent. Avino set 2014 guidance at 1.26 Moz silver equivalent.
It's always nice to put out reports for Buy-rated companies that beat our
estimates. I think 2015 will be another good year for Avino. The company is
commissioning Circuit 3, which should increase capacity by 1,000 tons per
day, and the grade should remain similar to the previously mined ore. In
fact, Avino could still make money in a slightly lower silver price
environment, which is impressive. My price target on Avino is $2/share.
TGR: What are some gold names under coverage?
HI: One we follow is Paramount Gold
and Silver Corp. (PZG:NYSE.MKT; PZG:TSX). Coeur Mining recently made a
bid for Paramount.
TGR: Do you expect that bid to succeed?
HI: I'm fairly confident it will. The bid makes sense for Coeur
because it needs the San Miguel silver property, which is next door to
Coeur's Palmarejo mine in Mexico that Coeur paid $1 billion for in 2007. The
$146M it is paying for Paramount is very reasonable in comparison. Under the
deal, Paramount will spin out its non-Mexican assets into a new publicly
traded company and Coeur would own just 4.9% of the new firm.
For the longest time there was a good arbitrage opportunity that
essentially still exists. Right now you're paying $5.98/share for Coeur. You
get 0.2016 shares of Coeur for each share of Paramount so that equals $1.20
each. You're only paying $1.26 for Paramount. In other words you're getting
the spinoff company, which will own the past-producing, open-pit Sleeper gold
asset in Nevada and $10M cash, for free—as long as the transaction closes
under the current terms.
TGR: Do you see a rival bid emerging?
HI: I don't think that will happen. The main asset here is San
Miguel, which is worth the most amount of money to Coeur Mining because it
already has a mill next door.
TGR: Any other gold names?
HI: Another one that I follow is Comstock Mining
Inc. (LODE:NYSE.MKT), with a price target of $2.50/share based on a price
deck of $1,200/oz gold and $17.50/oz silver.
Our target is based on 2,200 tons grading 0.29 grams per ton (0.29 g/t)
gold from the Lucerne mine in Nevada at an average recovery of 65%. That
should amount to 41,000 ounces (41 Koz) gold. Add in some silver and the
total is roughly 45 Koz gold equivalent from Lucerne in 2015.
There may be some production from Dayton late in the year but we haven't
factored any Dayton production into our model. Dayton production should grow
over the course of 2016 until it reaches full production, probably in 2017.
All together that leads us to a net present value calculation of about $223M
for the firm as a whole.
TGR: What are some other companies that you believe have compelling
narratives in 2015?
HI: One is PolyMet Mining Corp. (POM:TSX; PLM:NYSE.MKT). It's a very
viable project in northern Minnesota, an area that needs jobs. Governments at
all levels want economic development in that region. PolyMet is a long-term
story. There was a mine there before and the facility was used for decades.
TGR: Do you believe this will become a mine again?
HI: In the long term this could very well become a mine again.
TGR: What's your target on that one?
HI: The price target on PolyMet is still $2/share. The price target
didn't go down very much when we adjusted our price deck, essentially because
there are a lot of commodities such as copper and nickel for which we didn't
adjust our price deck.
TGR: Any others?
HI: There's also Wellgreen Platinum Ltd. (WG:TSX.V; WGPLF:OTCPK) in the
Yukon. In our opinion, this is an interesting project. The Wellgreen project
is still in the early stages of development. It is a big ore body that's
close to surface. All in all, we could probably see production of nickel,
copper and platinum at Wellgreen by 2018–2019. It's still in the early stages
but that's why we're only assigning a 0.4 net asset value (NAV) multiple to
the company. If you take the NAV of the deposit at face value it would be
about $4.50/share. I like the management team. I've met with them a number of
times. I like the story. I have a price target of $1.80/share on it.
TGR: Do you have any insight for investors who might be looking to
adjust their portfolios in preparation for this year?
HI: I think gold, silver and even base metals equities have a place
in everyone's portfolio. The world is moving away from cash so it's good to
have hard assets in your portfolio. I wouldn't make hard assets my only
investment, but people who are currently underexposed to hard assets should
certainly take a look at metals equities.
TGR: Thank you for talking with us today, Heiko.
